What are some of the reasons we see business owners start to plan their exit? Number one, the business just doesn’t excite them anymore. Sometimes they’ve inherited it from a relative, a father, a mother, and it just doesn’t excite them anymore, and they’re getting in their 50s, maybe 60s, and they want to move on to something else. Sometimes there’s been a health issue. I’ve had a number of clients come to me that said, “I had a health issue, and it made me realize that life is not guaranteed, and I want to do other things. I’ve had enough of this business. It’s eating me up, and I want to turn it over to employees or sell it.”
A lot of times the owner’s just ready to take chips off the table and pursue other interests. I call that rewiring instead of retiring, and that just means that business owner says, “I don’t want to quit working. I just want to do things differently or pursue other interests that I’ve had to put off on the back-burner while I ran this business.” Often, the owner recognizes that preparing for a business’s sale is a long-term process, and they want to be proactive to have the most options. They want options when it comes to their exit. Of all of those answers, from my perspective the last answer is the best answer, that you’re looking at preparing your business so it’s ready for sale if the best opportunity comes along or if an emergency comes along, and you want to be proactive so you have options when it comes time for your exit.
Some of the concerns that business owners tell us they have with regards to the process is that number one, they’ve got a legacy that they want to pass on in tact. They don’t want it to be tainted by someone coming in and ruining their culture or firing their key employees, so they’re worried about the legacy of the name of the business and the reputation of the business.
Second is, even if I were able to sell, the after-tax proceeds might not sustain my lifestyle. The value and security of the payments might not be enough to make me feel comfortable. It’s not worth leaving, so until I know that I’m going to get enough money and it’s going to be secure, I’m not really interested in giving up my golden goose.
Third is the impact of a sale to current employees and family members that are working in the business. A lot of times, small business owners tell me, “My employees are like my extended family. They’ve been with me for a long time, and I don’t want to just leave them high and dry with a new owner that I don’t know well who might fire them or not take care of them like I have. I might be thought poorly of.” Then also, family members obviously that are working in the business might have to go find other employment.
Disclosure of trade secrets before the transaction closes. Very important that business owners don’t give up too much information to potential buyers before the transaction closes or before they have real strong non-disclosure agreements in place. The length of time the owner will have to stay on after the sale. I’ve had a lot of people say, “If I leave, I’m going to have to stay here for a few years anyway, so I might as well just keep the business.” All of these are valid concerns and valid reasons for business owners, however, the situation still exists that someday the business owner will have to exit. So anything else is just delaying that exit.
What are some of the steps in preparing an exit plan? Again, I work through a group that’s a think tank of certified exit planners, and they’ve come up with a process that we put every business through to make sure we don’t forget anything. First is defining your exit goals and assembling your advisor team. We’ll talk more about those in the next slide as we come up. Preparing yourself and your business for exit. How do you get yourself ready and your business ready, and why is that so important? Then preparing for sale to an outsider, an outside buyer who’s going to come in and buy your business.
Then some people say, “No, no. I want to prepare my business for sale to an insider, to a key employee or another manager, or a group of managers or maybe all the employees.” Each of those has their separate path, and each of those needs to be planned for, but also each of those is a backup plan to the other way. If you’re planning to sell to an outsider and there’s no market out there, you better be planning to pull the trigger to a sale to an insider down the road. I’ll give you some examples of that later.
Same if you’re preparing for a sale to an insider, say key employee, or a family member, and down the road either something happens to them or they say, “I’m really not interested,” or they’re just not capable. You better have a backup plan for preparing to sell to an outsider. Last, is contingency planning because we’re all people. Things happen to people. We die. We get sick. We get hurt. We need to have a back up plan in case any of that happens. Those are the major steps in preparing an exit plan, and we’re going to go through each of those in more detail.
Let’s talk about your exit goals. We came up with something called the Five T’s to make it easy to remember. First of all, what’s your timing? What’s your timing? First stage is when you want to go from overtime to part-time on your day-to-day operations, so you can start focusing more on growing the business. Then what’s your timing for when you want to be fully out of the business? This is where a lot of people stall out. I talk to a lot of business owners and they say, “Five years. Five years is my timeline.” Then they don’t do anything about it, and guess what happens when you come back three years later? They’re still saying, “Five years.” We call that perma-five. They’re stuck in five-year planning mode, and nobody’s starting the clock. That’s what we want to do is definitely get those goals cemented so that we can start the clock on the timing.
Second is, who’s your target buyer? Again, is it the insider? Is it the key employee? Let’s understand where their funding’s going to come from and we’ll cover some other areas. Or is it an outside buyer, and which outside buyer? Is it a strategic buyer? Is it someone who wants to come in and buy the business, or how are we targeting our buyers?
Third is what are your treasure needs? Again, treasure is just a clever way for saying how much money do you need out of this deal when everything is said and done? You need to sit down and forecast out what your cash needs are going to be for the rest of your life and then apply inflation factors and potential investment yields, and bring it back to a number so you know with some clarity that you’re getting enough money for the transaction. Again, unless you start with how much money am I going to need for the rest of my life, and bring it back to a current present-value number, how are you going to know if you’ve sold your business for enough money?
Next, who’s on your advisor team? We’re going to talk more about the team, because this is definitely a process that’s going to require a team of advisors. The goal is to manage the team and make sure that they aren’t necessarily all working all the time on the plan. They’re just brought in when they’re needed, and they’re all focused on moving you in the right direction.
Lastly, who’s your key employee talent? The fifth T is talent. Who do you have that’s going to be able to run and grow the business in your absence? When it all comes down to it, if you leave the business, the value of the business is what you left behind, what people and processes are in place. We’ll talk a little bit more about that and why there’s a war for that talent because of the number of baby boomers that are heading for the exit. Very interesting phenomenon.
Let’s talk about the transfer slot machine. Defining your exit goals. The transfer slot machine says that there’s a big reason to be pre-planned for business sale, and that is that to get maximum value, three areas must line up like a slot machine in Vegas. The owner has to be ready. The business has to be ready for sale, and the market needs to be ready to give you the best multiples. If any of those is not in alignment, the sale won’t go through, or else it’ll be very sloppy, or else it won’t be for as much money as you’re going to need to get out of it. You’re not getting top dollar. We call that the transfer slot machine, and we basically want to figure out what areas do we need to work on? Owner readiness, business readiness, and market readiness.
Here’s an example of what I’m talking about, some of the preparation steps. What can the owner do? Well, the owner can first of all, reduce the business dependence on the owner. In other words, make the owner less relevant and important to the day-to-day operations. We want the owner to be moving above the day-to-day operations line if at all possible to the owner line and letting the work get done by the employees.
Second is the owner can continue to take money out of the business if they’re contemplating sale, not leaving cash in the business, because they’re just going to get it out at some other point, and then they have to negotiate for it. Harvesting cash from the business as appropriate. Again, this is one you want to talk about with your CPA and other financial advisers, with the eye on the fact that letting them know that you’re thinking about exiting your business, and they’ll give you different advice sometimes than if you’re just thinking about running it and growing it on a routine day-to-day basis.
Third, get your estate in order. Work on your trusts, your wills, your other estate and asset protection plans, because what happens when you go from a business asset to a cash or investment asset is you need to have your ducks in a row at that time, because you’re a much easier target for asset attacks, what we call predators and creditors. You start working on getting your estate in order and make sure that’s all taken care of.
From a business preparation standpoint, we want you to work on improving your financial records. In other words, you might need to clean up that P&L and remove some of those perks that you have built into there so that you can increase your sale value down the road, because they’re going to be buying usually based on a multiple of your net profits. You might want to have your financial statements audited for the three years before you move towards a sale. It’s going to be a lot cleaner. Somebody’s going to be looking at your stuff. It might as well be your people first. Somebody’s going to be looking at your financial statements very, very thoroughly.
Creating more and better systems. The more systems you have in place, the more processes you have in place, the better a buyer is going to look at your business, because they’re going to be worried about how can they integrate if it’s all in your head? If you don’t have processes and systems and job descriptions and things in place, and we’re going to give you enough checklists to make your head swim towards the end of this. The more that you have that you can plunk down on the table in front of them, in front of a potential buyer, the better your business will look and the more sell-able it’ll be.
Clean up the place. Take a look around. If you have a plant or a factory, take a look around as if you were coming into it for the first time and really take a look and see does this place look tidy? Does it look like operations are in order? If it’s just an office service business, are desks clean? Does everything look like it’s in place, or are there files all over the floor? What’s it look like? What can you start doing to look at that business like you’re a buyer instead of the routine walking in day-to-day?
Market preparation. Well, first of all, ride the wave. We all know that the M&A world goes through high-multiple times and low-multiple times, and you need to ready for sale at the time that the market’s in a high-multiple time, when there’s a lot of demand, and that’s going to be coming up as all these baby boomers start to head for the exit, so be ready and ride the wave. Get everything ready to go.
Consolidators may be watching, so you need to keep your eye on how you look in your industry, how you communicate, or how you’re communicated about within your industry, because there are certain industries that are going through roll-ups where the consolidators are buying and looking for well-run operational businesses, and they look at the industry trades. How do you stack up? How do you look in your industry trade periodicals? Are there articles written about you and what a good company you are?
Lastly, keep an eye open. Always keep an eye open for potential buyers. Especially take a look at who are the big players in your industry, and try to find out if you can what are they looking for? What niche are they looking for that maybe you can start moving your business to position it for a strategic sale? We’ll talk a little bit more about what a strategic sale purchase is versus a financial purchase in a minute, but keep your eyes open for what’s going on in your industry.